LCP FTSE 100 EXECUTIVE PENSIONS SURVEY 2015 The end of...
Transcript of LCP FTSE 100 EXECUTIVE PENSIONS SURVEY 2015 The end of...
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LCP FTSE 100 EXECUTIVE PENSIONS SURVEY 2015
The end of the road for Executive Pensions.
Overview 2
Main analysis 3
Budget 2015 analysis 8
Data and definitions 13
How LCP can help 12
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OVERVIEW
Ove
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30%The benchmark for cash in lieu
of pension.
£6bnAnnual savings to public finances
due to reductions in annual and
lifetime allowances1
Mark Jackson
PartnerLCP
Welcome to our annual survey of executive pension provision. This year’s report follows the Chancellor’s Summer 2015 Budget that announced yet more significant change for pensions.
In response to progressive reductions
in the annual and lifetime allowances,
our analysis confirms that companies
continue their move toward flexible
forms of pension compensation. Seven
out of ten executives in our survey
receive a flexible combination of
defined contribution (“DC”) and salary
supplement (“cash”), or cash alone.
Only one out of ten still earns a defined
benefit (“DB”) pension.
The Summer 2015 Budget confirmed
a new tapered annual allowance
with effect from April 2016. For the
executives in our survey this means a
reduction in the annual allowance to
£10k and signals the end of the road
as we know it for DB and DC executive
pensions. As a consequence, we expect
the move to cash will accelerate further
over the next year. Thereafter, the whole
pensions tax regime may be turned
upside down, and we consider what the
future holds in our report.
The impact of the Budget will be felt
well beyond the executives studied
in this report. Employers are facing
the challenge of communicating the
tapered annual allowance, and its many
moving parts, to employees who have
income of £110k or more - otherwise
surprise tax charges will become
common. To understand the impact
see our case studies in Budget 2015
analysis.
We hope you enjoy the insight and
analysis in this our 2015 survey.
Our survey alternates between
FTSE 100 and FTSE 250 companies
and this year our attention is on
executives in the FTSE 100.
1Source: HM Treasury green paper “Strengthening the incentive to save: a consulation on pensions tax relief.”
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LCP FTSE 100 Executive Pensions Survey 2015
Main analysis
This section sets out our analysis of pension compensation provided to FTSE 100 executives - covering cost, type and comparison with previous years.
Pension compensation as a percentage of total remunerationPension benefits remain an important part of executive remuneration, with an average value of £242,000 in 2015. As a percentage of annual remuneration, pension has fallen from 15% in 2013 to 13% in 2015.
2013Composition of average remuneration
2015Composition of average remuneration
Basic pay
Pension
Other
Basic pay
Pension
Other
£631,000 (38%)
£782,000(47%)
£242,000(15%)
£616,000 (33%)
£981,000(53%)
£242,000(13%)
See the Data and Definitions section for further details on what’s included above.
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Pension types offered to a FTSE 100 executive
None
Cash only
DC only
DB/cash
DB only
DC/cashDC/cash
% of executives with each type of provision 2015
None
Cash only
DC only
DB/cash
DB only
% of executives with each type of provision 2013
7%
16%5%
14%
27%
12%26%
4%
38%
10%
31%
7%
10%
Salary supplement (“cash only”) in lieu of any pension provision continues to
grow and is now in place for 38% of executives (up from 27% in 2013).
Flexible pension compensation, giving executives the choice of tax efficient
pension savings in a DC arrangement and/or cash (“DC/Cash”), has also grown;
to 31% of executives (up from 26% in 2013).
Taking these together, 7 out of 10 executives have the flexibility of cash in
lieu of pension. This is supported by the fact that 70% of executives recruited
during the year received a salary supplement as the only form of pension
compensation.
Cash only
DC only
DC/cash
% of executives with each type of pension provisionExternal appointments (in 2015)
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20%
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Cash in lieu of pensionBelow we set out the lower quartile, median and upper quartile to show
the range of provision for the 38% of FTSE100 executives who received this
benefit as their only form of pension provision.
% of basic salary
Lower quartile Median Upper quartile
2013
15% 20% 25% 30% 35% 40% 45%
15% 20% 25% 30% 35% 40% 45%
Lower quartile Median Upper quartile
2015
There has been no change in the cash benchmark in the past two years. We
expect remuneration committees will continue to set compensation amounts
at these levels in the near future.
Companies with cash in lieu
of pension for all executives
AstraZeneca
Barclays
Barratt Developments
BG Group
BT Group
Compass Group
G4S
HSBC
ITV
Johnson Matthey
Land Securities Group
Marks & Spencer
Meggitt
Morrisons
Old Mutual
RBS
Smith & Nephew
Smiths Group
Standard Life
United Utilities
Vodafone
Weir Group
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Defined Contribution and cashThe spread of compensation where executives receive a
combination of DC and cash compensation has narrowed
since 2013.
Lower quartile Median Upper quartile2015
Lower quartile Median Upper quartile2013
5% 10% 15% 20% 25% 30% 35%
5% 10% 15% 20% 25% 30% 35%
% of basic salary
Companies that state the DC/cash split for all executives
ARM Holdings
Aviva
Dixons Carphone
IAG
Lloyds
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Defined Benefit pensionsFew executives now earn a DB pension, but for those that
do, the cost to the employer is still far higher than for any
other type of pension benefit.
Lower quartile Median Upper quartile
2015Lower quartile Median Upper quartile
2013
25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75%
25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75%
% of basic salary
95% of UK-based executives earning DB pensions do so
outside of the UK tax-registered regime, via Employer
Financed Retirement Benefits Schemes (“EFRBS”). See
page 9 for more on EFRBS.
Companies with DB pensions for all executives
Associated British Foods
British American Tobacco
Diageo
SSE
Tesco
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No pension provisionOnly 4% of executives received no
explicit pension compensation.
Defined Contribution onlyFew executives received solely DC pension provision in 2015. Many of those that
do are at companies that offer DC pensions to executives on exactly the same
terms as other employees. For example, Admiral Group offer a contribution of
6% of pay (with an annual cap of £9,000 of contributions), while Hargreaves
Lansdown and EasyJet offer a contribution of 4% and 7% respectively of basic
pay to all eligible employees, including executives. The lower quartile and median
are therefore much lower than for the more typical DC and cash group.
Companies with no explicit
pension compensation
Antofagasta
Randgold Resources
Sports Direct InternationalLower quartile Median Upper quartile
2013Lower quartile Median Upper quartile
2015
0% 5% 10% 15% 20% 25% 30% 35%
0% 5% 10% 15% 20% 25% 30% 35%
% of basic salary
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Companies with DC pensions for all executives:
Centrica
BHP Billiton
Fresnillo
Hikma Pharmaceuticals
SABMiller
Shire
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The higher your “adjusted income”,
the lower your annual allowance.
£45,000
£40,000
£35,000
£30,000
£25,000
£25,000
£20,000
£15,000
£10,000
£5,000
£060 90 120 150 180 210 240
Annual Allowance
Adjusted income (£000s)
AlfDCAnnual allowance: £40k
Alf needs to be aware that any pay rise, bonus or other taxable income will reduce
his annual allowance.
Nil£40k
Tax charge on pension
contributions
Pension contributions in year (employer)
My earnings:
£110k
My “adjusted income”
£150k
BettyDCAnnual allowance: £25k
Betty is likely to want pension contributions limited to £25k if she can have cash in lieu
of the rest.
£6 . 25k£40k
Tax charge on pension
contributions
Pension contributions in year (employer)
My earnings:
£140k
My “adjusted income”
£180k
CharlieDCAnnual allowance: £10k
Charlie is likely to want pension contributions limited to £10k if his employer o�ers cash in
lieu of the rest.
£13.5k£40k
Tax charge on pension
contributions
Pension contributions in year (employer)
My earnings:
£170k
My “adjusted income”
£210k
Dot DC provided through EFRBSAnnual allowance: £10k
The annual allowance (and lifetime allowance) does not apply to Dot’s pension, but she will
pay tax when she receives it.
Nil£40k
Tax charge on pension
contributions
Pension “contributions” in year (employer)
My earnings:
£210k
My “adjusted income”
£210k
LCP FTSE 100 Executive Pensions Survey 2015
In the wake of Summer 2015 Budget this section looks at the impact for executive pensionsJuly 2015 Budget - The end of the road for executive pensions?In his Summer Budget, the Chancellor confirmed that the lifetime allowance will
reduce from £1.25m to £1m from April 2016. In addition, from April 2016 the annual
allowance will reduce for those with “adjusted income” of £150k or more. “Adjusted
income” is not just income used for income tax - it includes the value of pension
contributions/accrual funded by the employer or individual into registered pension
schemes. This includes salary sacrifice for DC schemes. Individuals could end up
paying very high rates of tax if they and their employers do not start planning now.
What does the tapered annual allowance look like?These case studies look at the tax impact for individuals across DC and DB schemes who have “adjusted income” above £150k.
Defined Contribution Schemes
Click to view full infographic
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Defined Benefit Schemes
Unused tax relief from 3 previous years is ignored in these case studies. In all of the above, the pension drawn will be subject to tax.
EFRBS – proceed with cautionAn Employer Financed Retirement Benefit Scheme (EFRBS) is a pension
scheme that is not tax-registered. If it is set up appropriately then benefits
paid during retirement are subject to income tax but free of National
Insurance. The annual allowance and lifetime allowance do not apply to
EFRBS.
EFRBS are used by some of the companies in our survey to provide DC
or DB to executives. As seen in our case studies, the tapered annual
allowance will have an impact on employees well beyond the executives
in our survey. Companies that currently use EFRBS may consider offering
access to a wider group of employees, and companies that don’t have
EFRBS may look at introducing one.
EmmaDBAnnual allowance: £25k
Emma’s employer should consider amending the scheme.
£40k £6 . 25k
Pension input amount (HMRC value of DB
pension earned in year)
Tax charge on pension input
amount
My earnings:
£140k
My “adjusted income”
£180k
Frank DB provided through EFRBSAnnual allowance: £10k
The annual allowance (and lifetime allowance) does not apply to Frank’s pension, but he will
pay tax when he receives it.
N/A Nil
Pension input amount (HMRC value of DB
pension earned in year)
Tax charge on pension input
amount
My earnings:
£210k
My “adjusted income”
£210k
EFRBS may prove to be a short term solution. Alongside the 2015
Budget the Government announced it “will consult on tackling the use
of EFRBS to obtain tax advantage in relation to remuneration”.
Click to view full infographic
LCP FTSE 100 Executive Pensions Survey 2015
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What will the future hold?In response to progressive reductions in the annual and
lifetime allowance, this report confirms that companies
continue their move toward flexible forms of pension
compensation, notably additional salary in lieu of pension.
The summer Budget will accelerate this move. Indeed, in
our opinion, it signals the end of the road for executive DB
and DC pensions – see our infographic “The Rise and Fall of
Executive Pensions.
Introduction of tax relief on pension contributions.
2002
1999
1989
1988
1974
1970
1921
2006
2010
2011
2012
2013
2014
2016
Top rate on income tax is raised to 83%.
Tax e�ciency of pension saving reaches a peak.
Limits on tax approved pensions standardised (e.g. 2/3 of final remuneration).
After successive cuts, the top rate of income tax stabilises at 40%.
A DB pension of 2/3 of final salary becomes the benchmark for executive pensions.
Introduction of the earnings cap on final remuneration.
Unfunded Unapproved Retirement Benefit Schemes evolve to provide pensions beyond the earnings cap.
This timeline highlights how executive pensions have been squeezed and shaped throughout the years to what we see today…
and the end of executive pensions as we know it?
The Rise and Fall of Executive Pensions
Only 5% of newly appointed executives in our survey are o�ered DC pensions.
Following significant increases to DB pension costs, 40% of newly appointed executives in our survey are o�ered DC pensions.
Annual allowance (£215k) and lifetime allowance (£1.5m) introduced as limits
on tax relievable pension savings.
The move from DB to DC pensions for executives continues.
The annual allowance peaks at £255k and the lifetime allowance at £1.8m.
The median employer contribution to DC for executives stabilises at 25% of salary for FTSE100 and 15% of salary
for FTSE250 executives.
The median cash in lieu of pensions stabilises at
30% of salary for FTSE 100 and 20% of salary for FTSE 250 executives.
Annual allowance cut to £50k.
Employers respond by o�ering cash compensation in lieu of
pension contributions.
Lifetime allowance cut to £1.5m.
Annual allowance reduced to £40k and lifetime allowance
reduced to £1.25m.
Text in italics refers to commentary in previous editions of LCP Executive Pension Survey
Tapered annual allowance to be introduced reducing to £10k for those with “adjusted income” above £210k.
Lifetime allowance reduces to £1m.
The end of the road for executive pensions. Cash in lieu of pensions prevail.
STOPGO
5%
83%
40%
£1.5m
£
30%
£10k
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Our future surveys will be much simpler - nearly all executives at this level will have cash in lieu of pension.
Julian Lyons
ConsultantLCP
Click to view full infographic
LCP FTSE 100 Executive Pensions Survey 2015
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A new tax regime?A green paper “Strengthening the incentive to save: a consultation on pensions
tax relief” was launched alongside the Summer 2015 Budget. The green
paper considers a fundamental review of the taxation of pensions. Currently,
the pension regime is known as EET: pension savings are exempt from tax;
investment returns are exempt from tax; the pension ultimately paid is subject
to tax.
The green paper considers a reversal of this regime – “TEE” – whereby pension
savings are taxed; investment returns are exempt from tax; the pension ultimately
paid is exempt from tax. This would bring the tax regime for pensions in line with
that for individual savings accounts (ISAs). The green paper recognises that some
form of additional incentive is needed if, unlike ISAs, pension savers are unable to
access their savings until age 55 or later.
For executive pensions, as we’ve seen in this report, the current system is actually
more like “TET” because a £10k annual allowance offers very little tax relief as
pensions savings. A “TEE” system could represent an improvement.
£50bnThe cost to the Treasury
of tax relief in 2013/141
1Source: HM Treasury green paper “Strengthening the incentive to save: a consulation on pensions tax relief.” Includes relief on income tax and National Insurance
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How
LC
P c
an h
elp
Action requiredEmployers need to identify the scope of employees
affected by the tapered annual allowance and review
current pension policy to ensure that this valuable
benefit is delivered efficiently. A big challenge for
employers will be warning employees of potential tax
charges on their annual pension savings.
LCP can help companies and their executives: � Review pension compensation to ensure it is in line
with market practice and delivered in a practical
and tax-efficient way;
� Communicate changes and explain the changing
tax regime to employees;
� Provide seminars and one to one meetings; and
� Provide online tax calculators to assist employees.
How LCP can help
Employers will need to find a way to communicate many moving parts in a streamlined way, otherwise surprise tax charges will be incurred unnecessarily.
Alasdair Mayes
PartnerLCP
LCP FTSE 100 Executive Pensions Survey 2015
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Data and Definitions � Our analysis covers the FTSE 100 constituents as at
30 April 2015.
� We have analysed published accounts with accounting
years ending during 2014.
� Pension values (including for DB pensions) have
been taken from each company’s single figure for
remuneration disclosures.
� We have considered executive directors in office at
the end of each company’s accounting year.
� An executive is a member of the board of directors
who is also a full-time employee of the company.
Total number of executive directors in survey: 284
In order to allow comparison between all FTSE 100
executive directors the following adjustments were
made to published audited information:
� Basic salary and cash allowance have been converted
to full year equivalents for executives who were
appointed partway through the accounting year.
� Currency conversions to sterling have been
undertaken at the exchange rate stated in the
accounts or, where this information is not available,
at the prevailing mid-market rate at the accounting
year end.
� “Other” includes items such as performance-related
bonus, taxable benefits and non-cash emoluments
received during the year. It does not include the value
of any vesting long-term incentive awards.
Pension types offered to a FTSE 100 executiveIn broad order of increasing corporate risk, the types of
provision are:
� no pension compensation;
� an explicit cash allowance in lieu of pension;
� a mixture of cash and contributions to a defined
contribution (DC) arrangement;
� contributions to a DC arrangement;
� a mixture of defined benefit (DB) pension and cash
allowance; and
� DB pensions.
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LCP is a firm of financial, actuarial and business consultants, specialising in the areas of pensions, investment,
insurance and business analytics.
Mark Jackson
Partner [email protected]
+44 (0)20 7432 6711
Alasdair Mayes
+44 (0)1962 872725
Julian Lyons
+44 (0)20 7432 7735